WATER RATE STUDY CITY OF SALIDA. Revised March West Sixth Street, Suite 200 Glenwood Springs, CO

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1 WATER RATE STUDY CITY OF SALIDA Revised March 2011 Prepared by Tyler Harpel, PE In Conjunction with City Staff 118 West Sixth Street, Suite 200 Glenwood Springs, CO fax

2 WATER RATE STUDY CITY OF SALIDA REVIEWED BY CHRIS LEHRMAN, PE SGM Project # DOCUMENT2

3 TABLE OF CONTENTS Report Summary Executive Summary Components Involved in Rate Study Existing Rate Summary Need for Rate Increase Proposed Changes to the Rate Structure Capital and Development Fees Discussion Existing Infrastructure Summary Expenditures Operations, Maintenance and Repair Management and Administrative Upcoming Capital Projects Total Annual Expenditures Revenues and Recommendations Revenues Additional Recommendations 5-2 LIST OF TABLES Table Water Rate Increase Per Current Table Historical Rates Table Historical Revenues/Expenditures Table Proposed Tiers Table Water Storage Summary Table Distribution Pipe Summary Table 5.1 Rate Increase Options Table 5.2 Rates in other Communities Water Rate Study i

4 LIST OF FIGURES Figure Historical Development Fees 2-6 Figure Total Estimated Expenditures 4-2 Figure 5.1 Expenditures vs Revenue and Growth 5-3 Figure 5.2 Expenditures vs. Revenue with 0.5% Growth and Annual Rate Increases 5-4 LIST OF ACRONYMS DIP EQR GPM In. K-Gal LF MG Mi. O&M PVC SGM The City WTP Ductile Iron Pipe Equivalent Residential Unit Gallons per Minute Inches Thousands of Gallons Linear foot Million Gallons Miles Operations and Maintenance Polyvinyl chloride ( plastic ) pipe Schmueser Gordon Meyer, Inc. The City of Salida Water Treatment Plant APPENDICES A Water Rate Model with No Rate Increase B Alternative Rate Increase Models C City of Salida Capital Projects Water Rate Study ii

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6 Report Summary The purpose of this report is to provide analysis results for the City of Salida s current water service rates to recommend the rate adjustments needed to meet anticipated expenditures. This report summarizes current and anticipated expenditures associated with operations and maintenance of the City s Water Distribution System as well as the water treatment plant (WTP) including long-term recommended operations and maintenance (O&M) costs and identified upcoming capital projects, in addition to known budgeted and historical expenses. This report is also created in conjunction with an overall water rates spreadsheet providing the City Staff with the tools to make appropriate future rate adjustments beyond the initial immediate recommended rate adjustments. Finally, recommendations are made for all components of the water rates including the service charge base rate, residential maintenance fee, commercial/industrial water demand charge and water usage charge to meet all of the identified expenditures including several options to weigh the importance between the different components. The rate study factored in estimates of all known costs. It should be noted that other unexpected costs could result in additional need for rate increases. As well as other capital projects not anticipated in this study may drive further increases. 1.0 Executive Summary Water service is provided to residents and property owners in Salida through an enterprise fund. This accounting structure is used for business-type activities. Water operations are not operated as a governmental fund supported by tax dollars. Revenue generated from the business activity (providing water) needs to be sufficient to pay for that activity. It is not a profit activity and revenues and expenditures need to balance appropriately. It does cost the City over $3.00 per thousand gallons actual cost to treat and provide water to the customers. The City has followed a revenue model whereby quarterly fees pay for operations and routine maintenance or upgrades; development fees pay for capital improvements and debt service on those improvements. In recent years, revenue has not kept pace with the capital needs and debt service requirements. The City made substantial investments in capital infrastructure including the high zone water tank, new transmission lines, upgrades to the treatment plant, the purchase and installation of radio-read meters and acquisition of water rights. Strong development activity in the mid 2000 s paid for a substantial portion of the capital improvements; however, it was not sufficient to fully pay for all improvements. In addition, aging facilities are continuing to require upgrades and maintenance to extend their service period. Development has now slowed substantially and is not sufficient to pay existing debt service or cover capital requirements. In 2010 the City depleted reserves and obtained a commitment for additional debt to pay for capital improvements of the Galleries Water Tank. Future capital requirements need to be paid for with water service fees and not depend on development fees. This rate study is conducted with the goal of determining reasonable rates based on actual water service charges and have included significant input from City Staff as well as elected officials and a concurrent ongoing capital improvement plan. Water Rate Study 1-1

7 Rates need to be raised to generate sufficient revenue to pay for current operating expenditures, debt service and capital requirements. Council has also considered whether or not rates need to be sufficiently increased to begin rebuilding reserves. Future development fees will be used to add to reserves. The City s goal is to operate the water system efficiently and design a rate structure whereby users of the water system share in its cost of operations in a fair and equitable manner. No one welcomes rate increases, but the culmination of several years (without sufficiently increasing these rates) proves that the City needs to substantially increase rates in order to cover costs because available reserves have been completely depleted. The revenue structure includes two types of fixed components and a third variable component on each quarterly bill. A flat service (or ready to serve ) fee. A maintenance fee (for residential customers) or a demand fee (for commercial customers). Charges per thousands of gallons of water used during the quarter. Many communities bill for water using tiered rates. The City will begin this practice as well. This method of billing creates an incentive for water conservation and fairly distributes costs between high and low water users. Under this method of billing, per gallon water usage charges increase if more than a certain number of gallons are used each quarter. Although the City needs to generate the fixed amount of total revenue, Council may choose to structure the rates differently to achieve the same result. Three alternatives are presented for council s consideration: Alternative A raises the service and maintenance fees more moderately than the per thousand gallons usage fee (40:60 model) Alternative B raises the service and maintenance fees by a greater percentage than the per thousand gallon usage fee (50:50 model) Alternative C raises the service fee substantially and the maintenance fee moderately; the per gallon usage fees are relatively unchanged except for the high usage category (60:40 model) Alternative D uses B s user rates and C s fixed rates to increase rates sufficient enough to ad an estimated $100,000 to $150,000 to reserves. The existing rate structure generates revenue at a ratio of roughly 40:60 from fixed fees versus usage. By increasing the service and maintenance fees by a greater percentage than the per thousand gallon usage fee, the City would achieve a more reliable and predictable revenue stream. Water Rate Study 1-2

8 2.0 Components Involved in Rate Study 2.1 Existing Rate Summary The City has been operating on a rate plan outlined in section of the City Code effective as of April 1, This plan contained four different divisions of revenues that combine to pay for the O&M of the water related expenditures. Water Service Charge (or Base Rate for both residential and commercial/industrial) Residential Maintenance Fee Commercial/Industrial Water Demand Fee Water Usage Charge (for both residential and commercial/industrial) All four components of water revenues are set in the code to increase annually across the board per the following table: Table Water Rate Increase Per Current Year % Increase % % % % % Following the increases outlined in the code the historical rates have been as follows: Table Historical Rates Quarterly Charges for Service Water Quarterly Charges Detail Rate Schedule Q Residential $ $ $ $ Service charge - Residential Service charge - 2nd living unit Maintenance Charge per quarter Commercial / Industrial $ $ $ $ 3/4 inch inch line inch line inch line inch line inch line Usage charge* $ $ $ $ per 1,000 gallons of water * Residential only - first 3,000 gallons/qtr exempt Water Rate Study 2-1

9 Demand charge for commercial $ $ $ $ Up to 100,000 gallons , ,000 gallons ,000-1,000,000 gallons Over 1,000,000 gallons Out of City limits 2x 2x 2x 2x Annual Percentage increase - water 3% 3% 3% 5% Some of the philosophies behind the existing rate structures are: A separate maintenance fee from the water service charge allows the City to maintain a separate fee that is sized respectively to the amount of ongoing maintenance required at the WTP and distribution system The water usage charge per 1,000 gallons used is in place to fairly distribute cost relative to how much a customer uses and also helps promote water conservation The water service charge (base rate fixed fee) provides a consistent, predictable and reliable revenue source The water usage charge does not apply until more then 3,000 gallons per quarter are used means that everyone gets some water at the base rate fixed fee only but typical house holds will use more than this The larger commercial/industrial water demand fee than the residential maintenance fee puts a little more of the burden on commercial/industrial customers than the residential customers Currently, the total revenue from the water rates (about 40%) comes from the fixed fees and about 60% comes from water usage, which places a stronger emphasis on the water usage portion 2.2 Need for Rate Increase Even with the above historical rate increases the City has been unable to keep up with the expenditures. The combination of rising cost of services, significant capital improvement projects over the past few years and the stunted growth has prevented the City from keeping up with the rising costs. This has not been a single year issue, but rather the culmination of more than three years of water fund operations. Table 2.3 shows historical revenues and expenditures for the last 3 years. WATER FUND Table Historical Revenues/Expenditures Actual 2008 Actual 2009 Actual Actual 2010 Actual (Prelim) Operating Revenues $ 581,562 $ 711,398 $ 826,492 $ 857,535 $ 871,240 Capital Revenues $ 255,405 $ 389,719 $ 378,177 $ 134,878 $ 136,488 Other Revenues $ 170,323 $ 674,080 $ 311,243 $ 33,380 $ 49,528 Total Revenues $ 1,007,290 $ 1,775,197 $ 1,515,912 $ 1,025,793 $ 1,057,256 Operating Expenditures $ 423,104 $ 520,323 $ 603,442 $ 533,710 $ 651,669 Capital Expenditures $ 707,690 $ 881,153 $ 1,715,414 $ 1,061,373 $ 312,491 Dept Expenditures $ 357,118 $ 280,402 $ 590,664 $ 1,275,657 $ 469,614 Total Expenditures $1,487,912 $1,681,878 $2,909,520 $2,870,740 $1,433,773 Over (Under) ($480,622) $93,319 ($1,393,609) ($1,844,948) (376,517) Water Rate Study 2-2

10 Water Fund reserves have been completely diminished before 2011 (in fact funds from the sewer fund were borrowed at the end of 2010). With the standard 5% increase for the 2011 budget, the final net revenue will still be in the red at approximately $650,000. In summary, the City s current water rate problem has been ongoing and will now take a substantial increase for a more balanced operation. 2.3 Proposed Changes to the Rate Structure As seen in the previous section each component of a rate structure has a related philosophy or emphasis associated with it, some of which have quantitative components tied to them. For example, the more water customers use (regardless of the capacities available) the higher the treatment cost and wear and tear on parts (but many of these are qualitative issues); therefore the rate structure for a specific community needs to be in line with the values, beliefs and needs of that specific community. Over the past several months there have been many conversations between City Staff, SGM and elected officials. SGM and City Staff has combined the information obtained is such discussions to propose minor changes to the rate structure itself independently of the rates. In general, due to the idea that rates will have to increase substantially to meet existing expenditures, it was decided to maintain the core of the rate structure with the same four fees/charges. Water Service Charge (or Base Rate for both residential and commercial/industrial) Residential Maintenance Fee Commercial/Industrial Water Demand Fee Water Usage Charge (for both residential and commercial/industrial) The first three are fixed and the last one (water usage) is variable and dependent on how much water the customer uses. There have been various discussions about eliminating the maintenance and water demand fees and simplifying it to one fixed and one variable fee. The main arguments behind this are its simplicity, along with the fact that the City currently does not have the size of the maintenance water demand fees respective to the maintenance/replacement cost. In the end it was decided that they would continue to buffer the change shock, and provide additional detail about the use of revenue. The second significant item of discussion was where to base the emphasis of the rates on the water usage or the fixed base service charge. The majority of Colorado water suppliers have been trying to put a larger emphasis on water usage over the past several years to promote water conservation in light of the West s ever increasing water shortages. One of the main tools that has been used for this are water usage tiers that have different water usage rates per 1000 gallons of water used. For example water may only cost $1.00 per 1000 gallons of water used up to 10,000 gallons per month (tier one) but then cost $2.00 per 1000 gallons for all water used between 10,000 and 20,000 per month (tier two). Many water suppliers have as many as four to six tiers. The advantages of this method are that it distributes the higher costs to the larger water users as well as gives incentive to conserve water. Disadvantages are that it makes it harder for both the customer and supplier to Water Rate Study 2-3

11 predict bills (customers like knowing just a fixed fee, suppliers like to be able to rely on the revenue), they required additional accounting and billing set up work, and if to expensive of tiers are implemented it can cause too much of a conservation and also effect the suppliers budget. In addition Salida has more than sufficient water resources for its exiting population and projected growth. On the flip side there were discussions of providing more free water and or fully eliminating the variable fee and just having a fixed fee. This gives the ability to very accurately predict revenues and then adjust them to easily match estimated expenditures. It does not however give any ability to control how much water is used and does not give any tool to fairly distribute larger cost to larger water users and lower cost to lower water users. In light of these discussions two things were done with the idea to utilize the best qualities from both sides: 1. Two tiers were added in to promote water conservation and fairness 2. The first tier was set to start at 6,000 gallons per quarter before any water usage fees kick in (it was only 3,000 gallons per quarter before; the 6,000 gallons per quarter, double the previous amount included in the base fee, is a reasonable level for a somewhat conservative individual customer to actually be at or under giving the lowest water users the possibility to only have the fixed fee) Table Proposed Tiers Charge Per Thousand Gallons Gallons per Quarter Residential Commercial Up to 6,000 No water usage charge Tier 1 rate 6,000 to 40,000 Tier 1 rate Tier 1 rate 40,001 + Tier 2 rate Tier 2 rate The last main discussion item was how to proportion the rate increase on both the fixed fees and the variable water usage fees. They could be simply raised across the board to maintain the historic 40% of revenues out of the fixed fees and 60% out of the variable water usage. Or bump up the emphasis on the fixed fees so the percent of revenues are 50:50. Or push the emphasis on fixed fees way up to 60:40 cut of the total revenues. At the end of the day the same bottom line needs to be achieved so revenues cover expenditures but how the rates are weighed can be moved around and this will manifest itself if how the bills look and what types of customers more of the weight gets distributed to. Today approximately 20% of customers use 18,000 gallons per quarter or less, and approximately 20% (25% of commercial customers) use more then 40,000 or more, with 60% within the tier 1 bracket. In the final Revenues and Recommendations section we will give three alternatives Alternative A (40:60 model) Alternative B (50:50 model) Alternative C (60:40 model) Alternative D (54:46 model) Under these scenarios a portion of the $3.00 per thousand gallons of water is covered by the fixed fees enabling the City to charge less for actual gallons used. Water Rate Study 2-4

12 2.4 Capital and Development Fees Discussion It is the typical industry standard that development pays its own way and therefore it is standard that water rates are to cover operations and maintenance and new development pays for capital improvements through development fees. This idea makes sense so that existing customers are not paying for additional infrastructure for new customers. One of the biggest issues however is the confusion that arises from definition of Capital and what would be considered a capital project that new development would pay for. If one was to scan across different municipalities they would many different definitions of a Capital project some saying it has to be new construction, some saying it has to be over a particular dollar amount. In reality the Capital Improvements that should be paid for by system development fees should only be Expansion Capital Improvements For example if a WTP is simply being expanded, say a new branch is being added, simply for more capacity then that project theoretically should be paid for fully by development fees (and if enough reserves are not built up at the time of the project for the debt service for that project). New distribution mains that only serve new areas or additional water rights would also fall into this category. However, the replacement of an existing main because of old age within a distribution system that serves existing customers should not be paid for by development fees but by the existing users. In Salida s case this is what the maintenance and demand fees should be used for. Other assets as well or even a full WTP that needs to be replaced (say you were completely building a new WTP but not increasing capacity at all) due to old age, wear and tear, decay, or even changes in technology or regulation would also fall under this category. But often all of such projects come out of a Capital budget and many think they should try to pay for this primarily off of development fees. Of course many projects are not this straight forward and should require an appropriate mix of existing user fees and development fees, new WTP that replaces an old one and adds capacity or the upsizing of an old dated water line that will serve new and existing customers. The engineering industry has tried to alleviate this problem by calling funds set aside to replace aging or outdated infrastructure as depreciation funds however this causes conflicts in the financing industry with the definition of depreciation. So for this report we will separate them out as capacity or expansion projects verses capital maintenance or replacement projects verses ongoing routine maintenance activities that also require funds. In the past the City of Salida has followed this traditional method relying on system development fees to pay for Capital Improvement projects and substantial development during the mid 2000 s did pay for a substantial portion Capital projects. Development and growth has significantly dropped off over the past two years and the City has determined that it not only relied too much on development fees but for the next few years with the volatility of the economy that it can not rely at all on development fees. Therefore the City has made the decision that it will not count on any development fees in the rate study and that all capital projects in the next few years are not growth or capacity related but asset maintenance and replacement and needs to be paid for out of the rates and more specifically the maintenance and demand charges. None of the projects on the CIP list are for expansion. All represent upgrades or replacements of existing system. Water Rate Study 2-5

13 Figure Historical Development Fees Development Fees $450,000 $400,000 $350,000 $300,000 Dollars $250,000 $200,000 $150,000 $100,000 $50,000 $ Development Fees As can be seen in the above chart development fees have dropped off significantly and show no signs of significant rebound anytime soon, but it is also not reasonable to assume there will be no development fees. In fact for the 2011 budget approximately $175,000 in development fees was anticipated. However they will not be included in the evaluation of the rate study and all actual development fees that come in will be set aside in reserves for true expansion capital projects. As can be seen later in the report under the capital projects section this rate study is being completed in concurrence with a water capital improvement plan that is determining the future water capital needs in the next ten years. One of the items in approximately 8-10 years is significant replacement of the flocculator in the WTP and this comes in two options MGD capacity replacement at approximately $1,014, MGD capacity replacement doubling the capacity at approximately $1, 520,000 For this rate study and determining how to increase rates in order to cover expenditures it needs to be anticipated that in 8-10 years $1,000,000 needs to be spent on the WTP to upgrade major aging equipment and this is independent of any kind of growth. If growth does not happen then only the 2 MGD replacement is needed and the existing customers need to cover that cost (and or debt service). If growth does happen and a 4 MDG replacement is needed then the existing customers still need to cover approximately $1,000,000 but the remaining $520,000 would be covered by the development fees that Water Rate Study 2-6

14 have been set aside as it was not included into the rate study for the operations and maintenance type capital improvement projects. Water Rate Study 2-7

15 3.0 Existing Infrastructure Summary This rate study is being produced concurrently with a water capital improvement plan (CIP). The CIP has the extended detail on the existing infrastructure and its required needs. 3.1 Source of Supply The City currently has three main sources of water supply. South Arkansas (Little River) surface water. This water is directed to the WTP through the Harrington Ditch, treated and distributed through the distribution system. The infiltration gallaries, groundwater source. This water is collected in an infiltration gallery and simply chlorinated and pumped into the distribution system, not ever going through the WTP. The pasquale springs groundwater source. This is also simply chlorinated and put into the distribution system without going through the WTP. There has been much discussion on looking into a well field water source and more detail on this can be found in the CIP; this does however have the potential to significantly rearrange how the City treats and supplies water also having a big effect on the rates no longer needing the WTP to treat surface water. For now it is assumed that funds are spent on the feasibility study for this alternative but nothing beyond that. 3.2 Water Storage The City currently has the possibility for approximately 4.5 MG of total water storage in various above-ground and below ground tanks. These tanks have been and are a large portion of the resent and ongoing capital projects. Table 3.1 below summarizes the City s water storage facilities. 3.3 Transmission Table Water Storage Summary Tank Capacity (MG) Condition Airport Tank 1.0 Newer, Glass line Gravity feed Tank 1.0 Concrete Tenderfoot 1.0 Not used, needs Telemetry work Gallaries Tank 1.5 Currently being relined Small Pasquale Springs Tank Unknown Small Needs to be relined Potable water is distributed to City customers through approximately 42 mi. of piping. Estimated distribution pipe size varies from 4-inch to 16-inch and includes primarily ductile iron (DIP) with some older galvanized steel pipes. The approximate installation period of the oldest operational pipe is before the 1950 s. It is unknown how much is old cast iron pipe and it is unknown how much at this time is more then 50 years old and at the end of its life cycle. It is generally accepted that the life of DIP water line is 50 years, however it is often pushed longer. Table 3.2 provides linear foot estimates for pipes. Water Rate Study 3-1

16 Table Distribution Pipe Summary Total Length of Pipe Material Size (in.) in Distribution System 1 (LF) 4 67, ,200 DIP or 8 37,160 Cast Iron 10 13, ,400 4 and to some extent 6 pipe is generally considered too small for any portion of distribution system. It is currently industry standard to not install less then 8 pipe for fire flow requirements in any new construction (with the exception that short isolated sections to a few users can be 6 but not part of the main distribution system. Therefore most anytime, such as on Sackett Street, if old smaller line is replaced it is upsized to a minimum of 8 to meet current fire flow requirements. Water Rate Study 3-2

17 4.0 Expenditures The City s water distribution system expenditures were estimated based on staff input, recent water fund budgets, CIP, and recent maintenance costs. Expenditures are broken up into the following categories: o Plant Operation, Maintenance and Repair o Management and Administrative o Public Works (distribution system) Operation, Maintenance and Repair o Anticipated Capital Projects o Existing Dept Service 4.1 Operations, Maintenance and Repair Expenses associated with operation, maintenance and repair of the system were determined for each the water treatment plant side and the distribution system side (responsibility of the Public Works Department). Staff salaries and related expenses are included as well as the share of equipment general operating equipment parts and supplies. Not included in this portion are larger maintenance/replacement capital cost such as line or pump replacement. They are included in the Anticipated Capital Projects section Cost estimates for this study are based on the City s actual historical costs. A 3% annual inflation factor for operating expenditures was factored into the model. The inflation % is one of the input factors into the model so it can be adjusted easily to actual values in the future. A summary of the anticipated expenses can be seen in the appendix models. 4.2 Management and Administrative Management and administrative costs are primarily related to billing activities, obtaining capital financing, processing new service applications, insurance coverage, and administrating the utilities codes such costs include expenditures related to staff salaries and overhead, professional services and source water rights and development. They have been provided by City staff and are based on past actual financial data. No additional staff is anticipated to be required in the scope of this rate study. 4.3 Upcoming Capital Projects Upcoming capital projects have been determined with assistance from City staff and are looked at in more detail in the CIP. Appendix C has the table of all anticipated upcoming capital projects. It should be noted that cost for waterline upgrades to meet fire flow demands were omitted from the list at this time pending data resolution. There is a line item place holder but this needs to be updated as better information is obtained. 4.4 Total Annual Expenditures The anticipated total annual expenditures for the City s water system are represented as the sum of all costs associated with Operations, Maintenance and Repair, Water Rate Study 4-1

18 Management and Administrative, Upcoming Capital Projects and Debt services. Such costs average approximately $1.4 million annually based upon current levels of billed water usage, it costs the City just over $3.00 per thousand gallons produced and delivered. Figure Total Estimated Expenditures Total Expenditures $2,500, $2,000, Dollars $1,500, $1,000, $500, $ Year Treatment Plant Public Works Administration Debt Service Total Expenditures Capital There are three important factors in the above chart to point out. First, in 2011 the total net expenditures take a noticeable drop even though even though all the individual line item expenditures increase. This is due to an $525,000 intergovernmental funding source, a loan, primarily set aside for storage tank liner costs and other capital projects. It is possible that additional such funding sources could be available in the future for other projects but this can not be anticipated. Debt coverage ratios are also unlikely to be met for water operations. Secondly there is a huge increase for 2014, 2015 and This is due to water treatment plant upgrades identified in the CIP. The reserves would not be there to fully fund these capital projects by 2014 with out population growth so it may have to require a loan and or pushing it off to a later date. Please see the Appendix for a detail spreadsheet of anticipated upcoming capital projects. Next is the drop in the next expenditures in This can be seen as a direct relationship to the drop in the Debt Service at that time. This will help alleviate future rate increase needs at that time. Last is the significant spike in 2019, this is for $1 million dollar plus water treatment plant replacement project. Water Rate Study 4-2

19 5.0 Revenues and Recommendations Revenues Revenues allow the City to ensure delivery of adequate, high-quality water to its customers and offset the City s water distribution system expenditures. Revenues typically come from both non-service fee sources, as well as standard quarterly service fees. As noted above if all components of the water rate are only increased by 5% that would put the 2011 year end revenue/expenditure balance at approximately a negative $650,000 and reserves have already been completely depleted. Per the recommended rate structure changes we are providing three options of rate increase to balance revenues with expenditures for All of the three options have more or less the same City with water fund bottom line but each of the three distribute them differently. Table 5.1 Rate Increase Options Quarterly Charges for Water Services Alternatives Residential Service Charges A B C D Service charge - Residential $ $ $ $ Service charge - 2nd living unit $ $ $ $ Maintenance charge per quarter $ $ $ $ Commercial / Industrial A B C C 3/4 inch $ $ $ $ inch line $ $ $ $ inch line $ $ $ $ inch line $ $ $ $ inch line $ $ $ $ inch line $ $ $ $ Usage charge A B C C Tier I (up to 40,000 gallons/qtr) * $ 1.85 $ 1.50 $ 1.25 $ 1.50 Tier II (over 40,000 gallons/qtr) $ 2.25 $ 2.00 $ 1.50 $ 2.00 Demand charge for commercial *Residential only - first 6,000 gallons/qtr exempt Up to 100,000 gallons $ $ $ $ , ,000 gallons $ $ $ $ ,000-1,000,000 gallons $ $ $ $ Over 1,000,000 gallons $ $ $ $ Out of City Limits 2x 2x 2x 2x Base Fee : Usage Fee Ratio 40:60 50:50 60:40 54:46 Water Rate Study 5-1

20 These three options increase the fixed fee rates considerably but they also double the amount of water that is included in the fixed fee rate. In evaluating the rate increase it is important to also understand how the potential rates compare to other Colorado Communities. It is not just Salida but most all communities that have to look at significant water rate increases. In the table below all rates are current updated for 2011 rates. The exception are the two lower rate communities, Gunnison and Alamosa which are January 2010 rates and it is unknown if these two communities are currently looking at rate increases. Comparable Community Rates Table 5.2 Rates in other Communities Gallons included # of Tiers in Base Fee Quarterly Base Fee * Tier One Range gallons Cost of Tier One Per 1,000 gallons Typical Residential Using 30,000 per Quarter Gunnison $12.63 None Three 0-5,000 $1.46 $57.93 Buena Vista** $ ,000 One 15,000+ $2.19 $ Canon City*** $27.90 None Three 0-12,000 $1.30 $84.85 Alamosa $15.60 None Three 0-8,000 $1.10 $49.80 Crested Butte $ ,000 Six 24,000-39,000 $2.85 $83.10 Roaring Fork Water and Sanitation District $66.00 None Four 0-31,500 $1.70 $ Town of Basalt $51.00 None Four 0-31,500 $1.60 $99.00 Existing 2011 Salida $ ,000 One 3,000+ $1.24 $66.18 Salida Option A $ Two 6,000-40,000 $1.85 $88.40 Salida Option B $ Two 6,000-40,000 $1.50 $92.00 Salida Option C $ Two 6,000-40,000 $1.25 $96.00 Salida Option D $ Two 6,000-40,000 $1.50 $ *Many communities bill monthly but for this table all are compared per Quarter **Buena Vista has a Senior Citizen discounted rate of approximately 75% ***Canon City is the only community that has a separate base fee and usage fee for commercial One of the important issues the above table highlights is the differences between the proposed options A, B and C. As more emphasis is put on the fix fee rather then the water usage from option A to C the quarterly increase for the typical residential user is about $4.00 per quarter. Again all three alternatives produce the same amount of total revenue for the City but distribute it differently between different types of customers. Option C with higher fixed fee and lower water usage moves more of the weight to all customers evenly but provides a more reliable and predictable income regardless of water usage. Option A puts more weight on high water users having them pay for the more water that they are using, but is a less stable source of revenue (a high water user with a high bill could try harder to use less water, also an increase in % of second or part time home owners would also have a negative impact on revenues decreasing the typical amount of water used per customer). 5.2 Additional Recommendations Annual Rate Increase beyond 2011 Above are the three alternatives for rate increases in 2011, but it is important to look out farther then that into The hard part is the predictability of future revenues becomes Water Rate Study 5-2

21 much more difficult to predict. The hardest component to predict is the population (customer) growth. Since the 1950 Salida has experience decades of large 20-30% growth followed by decades of slight decline and it is anticipated that for the next 10 years growth should be fairly flat. The requirement for rate increases beyond 2011 depends significantly on the growth rate. At a growth rate of between 2-3% the rate is sustainable without any increase in the next 10 years, at.5-1.5% growth annual rate increases are required on the range of 2-5% annually depending on inflation rate and growth rate. The model gives City Staff the ability to update annually the growth rate and inflation rate and determine what if any rate increase is required for that year. This eliminates the current situation where rates did not keep pace with needs for several years. Figure 5.1 Expenditures vs Revenue and Growth Expenditures vs Revenue and Growth 3,500,000 3,000,000 2,500,000 Dollars 2,000,000 1,500,000 1,000, , Years.5% annual growth 2% annual growth 3% growth rate Expenditures Based on the above chart due to the capital expenses anticipated in 2014, 2015 and 2016 expenditures can not be balanced with revenues in without significant rate increases in those years as well. But as can be seen in years beyond 2016 significant rate increases in 2014 would not be warranted beyond those years. An annual growth rate of.5% does not keep up with expenditures without additional rate increases. But as little at 2% annually does, and 3% growth would more then sustain revenues over expenditures. Two points can be drawn from the above figure. First, needed capital projects in 2014, 2015, 2016 and 2019 can not happen as planed without financing (new loans) and significant population increase or else they need to be pushed off. Second the percent rate increase beyond 2011 is strongly dependent on the growth rate that occurs; 2% annual growth rate will sustain long term expenditures without rate increases in the future. If less then 2% growth is seen in the future annual rate increases will need to take place on the range of 1-5% a year depending on the growth rate. The City staff can use the provided model and Water Rate Study 5-3

22 update it annually depending on true growth rate and see what 1-5% rate increase is needed. Figure 5.2 Expenditures vs. Revenue with 0.5% Growth and Annual Rate Increases Expenditures vs Revenue with.5% growth and annual rate increases Dollars Years 3% annual rate increase 5% annual rate increase Expenditures So both a 3% and 5% annual rate increase each year from 2012 and on balance out expenditures over the long run with even just a.5% annual growth rate but because of capital projects in the next three years there is no reasonable rate increase in 2012 and beyond to fund then as they are without financing. Also as noted several times in the report the actual cost per thousand gallons of to supply water is greater then what is charged in the water usage rate. The difference is made up in the fixed fees. Because there is a larger percentage of residential customers verses high use commercial customers the residential customers carry a heavier weight of the overall cost in the fixed fees. Also as stated above this helps provide a more reliable and predictable revenue streams. If it is desired to shift how the expense weight is balanced the it is common to add an additional tier or tiers that have for high water users that is above that actual $3.00 per thousand gallons number. Water Rate Study 5-4

23 Appendix A Water Rate Model with No Rate Increase Preliminary Engineering Report Appendix A

24 Water Rate Model NO RATE INCREASE BEYOND % Quarterly Billing Cycle Key Metrics: Usage (gallons - in thousands): Assumptions: Residential 150,000 33% Residential/commercial base fee $ /4" inch line; increase commensuate with line size for commercial accounts Commercial 300,000 67% Gallons considered "base usage" 3,000 Residential only commercial 450,000 Percentage of readings less than base usage 2000% 1,516 8,143 # readings under base to total readings Residential usage (thousands) - estimate 150,000 Water cost: Avg / Customer Residential gallons estimated over "base usage" 160,000 Based on 2010 usage totals Avg Cost $ 1,398,000 $ 527 Higher tier usage - residential 20% Based on 2010 usage totals / gallon (000's) $3.11 Higher tier usage - commercial 25% Usage Charges (per thousand gallons): Cost to customers based on gallons used Charge for base usage $ - 3,000 gallons/qtr Residential $ 466,000 $ % Residential usage fee > base $ 1.25 Commercial 932,000 2,076 67% Commercial usage fee $ 1.25 $ 1,398,000 Tier II usage fee $ % increase factor Flat cost per number of customers: Tier III usage fee $ % increase factor Residential $ 1,161,580 $ % Residential maintenance fee $ Commercial 236, % Commercial demand fee base $ % of residential maint fee. Increase according to usage tiers. $ 1,398,000 Commercial usage (thousands) - estimate 300,000 Costs to customers based on model: Out of city limits multiplier 2.00 times in city rates Residential $ 516,210 $ % Inflation factor for operating expenditures 3.00% annual Commercial 499,755 1,113 49% Residential growth factor 0.50% annual $ 1,015, Expenditures Plant operation, maintenance and repair $ 461,622 $ 450,500 $ 464,015 $ 477,935 $ 492,274 $ 507,042 $ 522,253 $ 537,921 $ 554,058 $ 570,680 $ 587,800 Management and administration 81,179 91,800 94,554 97, , , , , , , ,778 Public works operation, maintenance and repair 108, , , , , , , , , , ,581 Operating expenditures (cash basis) 651, , , , , , , , , , ,159 Debt Service 469, , , , , , , , , , ,200 Interfund loan repayment - 250, Capital 312, , , , , , , , ,000 1,181, ,000 Total expenditures 1,433,773 1,857,400 1,408,821 1,451,455 1,884,619 1,688,734 1,814,918 1,378,391 1,224,875 2,284,890 1,296,359 Less: New financing sources - (525,000) Cash requirements $ 1,433,773 $ 1,332,400 $ 1,408,821 $ 1,451,455 $ 1,884,619 $ 1,688,734 $ 1,814,918 $ 1,378,391 $ 1,224,875 $ 2,284,890 $ 1,296,359 Revenue Customers or Usage Residential: 2,206 Single Family Residential 2, , , , , , , , , , , ,293 Single Family out of city 9 1,298 1,363 1,370 1,377 1,384 1,390 1,397 1,404 1,411 1,418 1,426 Multi-Family Residential (2 units) ,809 26,048 26,178 26,309 26,440 26,573 26,705 26,839 26,973 27,108 27,244 Multi-Family out of city Maintenance Fee - in city 2, , , , , , , , , , , ,391 Maintenance Fee - out of city 10 2,043 1,102 1,107 1,118 1,135 1,158 1,187 1,223 1,267 1,318 1,379 Billed usage (thousand gallons) 150, , , , , , , , , , , ,182 Incremenetal revenue from higher tier usage 13,333 13,400 13,467 13,534 13,602 13,670 13,738 13,807 13,876 13,945 Commercial: 449 In City base 3/4" line ,194 21,202 21,202 21,202 21,202 21,202 21,202 21,202 21,202 21,202 21,202 1" line 109 9,435 10,977 10,977 10,977 10,977 10,977 10,977 10,977 10,977 10,977 10, " line 19 2,329 2,877 2,877 2,877 2,877 2,877 2,877 2,877 2,877 2,877 2,877 2" line 26 4,500 5,256 5,256 5,256 5,256 5,256 5,256 5,256 5,256 5,256 5,256 3" line 7 2,084 1,590 1,590 1,590 1,590 1,590 1,590 1,590 1,590 1,590 1,590 4" line 8 3,846 2,423 2,423 2,423 2,423 2,423 2,423 2,423 2,423 2,423 2,423 Out of City base 3/4" line " line " line " line " line " line Commercial Demand up to 100,000 gallons ,881 29,284 29,284 29,284 29,284 29,284 29,284 29,284 29,284 29,284 29, , ,000 gallons ,017 18,911 18,911 18,911 18,911 18,911 18,911 18,911 18,911 18,911 18, ,000-1,000,000 gallons 17 5,945 11,705 11,705 11,705 11,705 11,705 11,705 11,705 11,705 11,705 11,705 over 1,000,000 gallons 20 10,490 18,360 18,360 18,360 18,360 18,360 18,360 18,360 18,360 18,360 18,360 Usage (thousand gallons) 300, , , , , , , , , , , ,250 Tier II fee 25% 93,750 93,750 93,750 93,750 93,750 93,750 93,750 93,750 93,750 93,750 Tier III fee 0% Late fees and other revenue 41,997 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 Total revenue 907,835 1,025,965 1,028,546 1,031,757 1,035,615 1,040,150 1,045,400 1,051,416 1,058,262 1,066,016 1,074,773 Over (under) cash requirements $ (525,938) $ (306,435) $ (380,275) $ (419,698) $ (849,004) $ (648,584) $ (769,518) $ (326,975) $ (166,613) $ (1,218,874) $ (221,586) I:\2008\ City of Salida Engineer\ Water Rate Study\Data\Tyler's spreadsheets\march Revised\2011 Water Rate Study NO Rate Increase.xls

25 Appendix B Alternative Rate Increase Models Preliminary Engineering Report Appendix B

26 Water Rate Model ALTERNATIVE A Quarterly Billing Cycle Key Metrics: Usage (gallons - in thousands): Assumptions: Residential 150,000 33% Residential/commercial base fee $ /4" inch line; increase commensuate with line size for commercial accounts Commercial 300,000 67% Gallons considered "base usage" 6,000 Residential only commercial 450,000 Percentage of readings less than base usage 20% 1,516 8,143 # readings under base to total readings Residential usage (thousands) - estimate 150,000 Water cost: Avg / Customer Residential gallons estimated over "base usage" 120,000 Based on 2010 usage totals Avg Cost $ 1,398,000 $ 527 Higher tier usage - residential 20% Based on 2010 usage totals / gallon (000's) $3.11 Higher tier usage - commercial 25% Usage Charges (per thousand gallons): Cost to customers based on gallons used Charge for base usage $ - 6,000 gallons/qtr Residential $ 466,000 $ % Residential usage fee > base $ 1.85 Commercial 932,000 2,076 67% Commercial usage fee $ 1.85 $ 1,398,000 Tier II usage fee $ % increase factor Flat cost per number of customers: Tier III usage fee $ % increase factor Residential $ 1,161,580 $ % Residential maintenance fee $ Commercial 236, % Commercial demand fee base $ % of residential maint fee. Increase according to usage tiers. $ 1,398,000 Commercial usage (thousands) - estimate 300,000 Costs to customers based on model: Out of city limits multiplier 2.00 times in city rates Residential $ 654,944 $ % Inflation factor for operating expenditures 3.00% annual Commercial 711,744 1,585 52% Residential growth factor 0.50% annual $ 1,366, Expenditures Plant operation, maintenance and repair $ 461,622 $ 450,500 $ 464,015 $ 477,935 $ 492,274 $ 507,042 $ 522,253 $ 537,921 $ 554,058 $ 570,680 $ 587,800 Management and administration 81,179 91,800 94,554 97, , , , , , , ,778 Public works operation, maintenance and repair 108, , , , , , , , , , ,581 Operating expenditures (cash basis) 651, , , , , , , , , , ,159 Debt Service 469, , , , , , , , , , ,200 Interfund loan repayment - 250, Capital 312, , , , , , , , ,000 1,181, ,000 Total expenditures 1,433,773 1,857,400 1,408,821 1,451,455 1,884,619 1,688,734 1,814,918 1,378,391 1,224,875 2,284,890 1,296,359 Less: New financing sources - (525,000) Cash requirements $ 1,433,773 $ 1,332,400 $ 1,408,821 $ 1,451,455 $ 1,884,619 $ 1,688,734 $ 1,814,918 $ 1,378,391 $ 1,224,875 $ 2,284,890 $ 1,296,359 Revenue Customers or Usage Residential: 2,206 Single Family Residential 2, , , , , , , , , , , ,095 Single Family out of city 9 1,298 2,016 2,026 2,036 2,046 2,057 2,067 2,077 2,088 2,098 2,109 Multi-Family Residential (2 units) ,809 38,528 38,721 38,914 39,109 39,304 39,501 39,698 39,897 40,096 40,297 Multi-Family out of city Maintenance Fee - in city 2, , , , , , , , , , , ,902 Maintenance Fee - out of city 10 2,043 1,360 1,367 1,381 1,401 1,430 1,466 1,510 1,564 1,627 1,702 Billed usage (thousand gallons) 150, , , , , , , , , , , ,192 Incremenetal revenue from higher tier usage 14,800 14,874 14,948 15,023 15,098 15,174 15,250 15,326 15,402 15,479 Commercial: 449 In City base 3/4" line ,194 31,360 31,360 31,360 31,360 31,360 31,360 31,360 31,360 31,360 31,360 1" line 109 9,435 16,237 16,237 16,237 16,237 16,237 16,237 16,237 16,237 16,237 16, " line 19 2,329 4,256 4,256 4,256 4,256 4,256 4,256 4,256 4,256 4,256 4,256 2" line 26 4,500 7,775 7,775 7,775 7,775 7,775 7,775 7,775 7,775 7,775 7,775 3" line 7 2,084 2,352 2,352 2,352 2,352 2,352 2,352 2,352 2,352 2,352 2,352 4" line 8 3,846 3,584 3,584 3,584 3,584 3,584 3,584 3,584 3,584 3,584 3,584 Out of City base 3/4" line ,120 1,120 1,120 1,120 1,120 1,120 1,120 1,120 1,120 1,120 1" line " line " line " line " line Commercial Demand up to 100,000 gallons ,881 21,692 21,692 21,692 21,692 21,692 21,692 21,692 21,692 21,692 21, , ,000 gallons ,017 14,008 14,008 14,008 14,008 14,008 14,008 14,008 14,008 14,008 14, ,000-1,000,000 gallons 17 5,945 8,670 8,670 8,670 8,670 8,670 8,670 8,670 8,670 8,670 8,670 over 1,000,000 gallons 20 10,490 13,600 13,600 13,600 13,600 13,600 13,600 13,600 13,600 13,600 13,600 Usage (thousand gallons) 300, , , , , , , , , , , ,250 Tier II fee 25% 168, , , , , , , , , ,750 Tier III fee 0% Late fees and other revenue 41,997 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 Total revenue 907,835 1,376,688 1,379,962 1,384,014 1,388,867 1,394,555 1,401,127 1,408,645 1,417,188 1,426,852 1,437,755 Over (under) cash requirements $ (525,938) $ 44,288 $ (28,859) $ (67,440) $ (495,752) $ (294,179) $ (413,791) $ 30,253 $ 192,312 $ (858,039) $ 141,395 I:\2008\ City of Salida Engineer\ Water Rate Study\Data\Tyler's spreadsheets\march Revised\2011 Water Rate Study.5 growth rate.xls